Notes From Underground: … And From The Joker (IMF Director Christine Lagarde)

Today we got follow-through in the global equity markets as the EUR/YEN cross rallied to three-year highs since the YEN was, again, the chief recipient of the Bank of Japan’s (BOJ) enhanced efforts to bring forth inflation from a long time deflation-plagued economy. The Japanese investors were busy sending forth YEN in search of yield but also buying NIKKEI stocks in a return for domestic yield. A positive outcome from the sudden desire of Japanese investors into equities may mean an increase in corporate democracy as the demand for dividends is going to increase. The corporate culture in Japan has always been anti-shareholder as the predominant thought is that management owns corporations and the shareholders should be quiet and not make waves. The status quo has been challenged by some foreign activist investors and always rebuffed in a very anti-democratic show of defiance. As the desire for an income stream for investors, look for the ABE government to be supportive of increased democratization of corporate Japan. The flow of corporate money to investors would aid domestic demand, especially as bond returns go negative.

To visualize the impact of the Japanese I am going to post a beautiful chart of the 10-year notes and also 2/10 yield curves, courtesy of Bloomberg (see below). Notice some of the moves in the more outlier countries. Also, the Aussie curve is in a bull flattening mode. It is the buying of longer term Aussie debt that is driving the spread narrower. The Japanese global spread of capital is going to cause all types of distortions in world financial markets and the yield curves are going to be very volatile. The QUESTION FOR US IS (AND WILL BE): WILL OTHER CENTRAL BANKS GET THEIR SHORT-TERM INTEREST TO PREVENT YIELD CURVE INVERSIONS? This will be a very important question for all asset classes as we move forward. If Central Banks feel the need to offset the Japanese action, many of the more higher-yielding currency countries will be forced into action, or we will see some type of CAPITAL CONTROLS. I don’t know when but we will let the market barometers be our guide.

***Notes From Underground readers know that since the IMF mishandling of the Cypriot Bank Crisis I have referred to Christine Lagarde as the Joker (Dylan’s All Along the Watchtower). Well, the joker was at it again. In today’s Financial Times and other various news sources, it was reported that Director Lagarde was praising the recent moves by the Bank of Japan and the Ministry of Finance. The FT quotes Madame Lagarde: “Unconventional measures had helped global growth and the ‘reforms just announced by the BOJ are another welcome step in this direction.'” This is the same IMF and its G-7 conclave that has opposed Japanese efforts to weaken its currency and warned it against taken the drastic step of buying foreign bonds. Although, back in October 2012, this BLOG called readers’ attention to a change in the IMF mindset when the Japanese hinted at buying at bonds of the crisis-impacted European peripheries. (See blog from October 14, 2012). The only time the IMF has condoned Japanese currency action when the MOF/BOJ were attempting to halt severe YEN appreciation in times of the RISK-OFF scenario.

Lagarde putting voice to Japan’s move to ramp up the GLOBAL CURRENCY WARS is exactly what the IMF was created to prevent. In a Reuters piece February 12, “G7 Fires Warning Shot over Currencies, Markets Confused,” the article says: “The G7 declared that fiscal and monetary policies would not be directed at devaluing currencies, a statement meant to soothe nerves that Tokyo was aiming to guide the yen lower with its aggressive expansion of monetary policy.” When a country’s citizens own more than 90% of its bonds and the central bank is buying bonds to drive rates lower, the sellers are domestic-based and thus be forced to search out yield elsewhere–currency markets are the target by default. In the realm of global macro finance, TRUTH IS A MOVING TARGET. At the game of international financial poker, THE JOKER IS WILD.

Alex–dead right on but it is a short term fix.Lower yields will be a short term story for Europe as it will not solve the problems of no growth in Europe.it will not also stimulate global growth as Japan’s gain will come from Europe’s loss—good luck to the French and German auto makers–especially the french renault,puegeot and fiat will certainly struggle as the Japanese corporations become ultra profitable and will be on an aggressive pricing model to regain lost market share.You are totally correct about the mutually beneficial supposition—but it is a short term feel better story and draghi and Hollande will point to reduced spreads between German debt and the other sovereigns–but the question will be where is the growth as the Euro becomes the depository of global money but for all the wrong reasons—do you really want to lend france money at the same rate as U.S. ten year notes???

Other markets beyond sovereign bonds are bound to continue to take some of these flows as the G7 central banks get what they want in pushing the whole world over into risk assets. Even several rival central banks are being forced into non-traditional central bank assets. Who would want to lend to any of these Sovereigns at negative real interest rates? The trouble is, where does the big money go? US equities have already been bought in mass. Corporates are overvalued and in my view are among the worst investments in the current environment. Investment into China’s financial markets is opening up, but slowly. Add the threat of bail-in’s lurking in the background and you get the crazy financially repressed world we live in! It’s tough slugging out there right now.

The Ligne Maginot is $1.35
The Siegfried Line is $1.50
Japan’s actions of the past months are an economic Pearl Harbor.
Was the timing of Cyprus just a coincidence like all European crises since the European Constitution crisis ?
You can devalue without printing…and get reelected.Too bad for the collateral damage.
So Lagarde is the Joker. Who then is the Thief ?

Merkel–is the thief– if you can Drake scroll back to the blog of March 19th—thanks for view and I love the allusions to famous military failure —-Lagarde is the legal expert so the Joker fits just right as she is the pure definition of a French Diplomat—“an honest woman sent abroad to lie for her country”